Interpreting Limits on Liability

Transcription

1 Interpreting Limits on Liability ITECHLAW Melbourne 27 February 2014 Anthony Foley Partner Baker & McKenzie, an Australian Partnership, is a member firm of Baker & McKenzie International, a Swiss Vereen with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

2 Background Exclusions, limitations, caps and indemnities Disclaimer: this is not a comparative law analysis, a survey on market practice or a drafting workshop 6 ideas in 20 minutes 2

3 Agenda Direct v Indirect The meaning of consequential loss The exclusion of consequential loss Loss of profit Rules of construction Indemnities 3

4 Interpretation of exclusion clauses the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where, where appropriate, construing the clause contra proferentem in a case of ambiguity (emphasis added) Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 4

5 Hadley v Baxendale Two limbs: damages which are according to the usual course of things or which directly and naturally flow from the breach (the first limb) damages which may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as a probable result of its breach (the second limb) Rule deals with remoteness of damage (i.e. it grades losses according to the contemplation of the parties) 5

6 Direct and indirect loss Direct Costs of obtaining replacement services Costs incurred in in replacing faulty equipment Temporary bypass/ workaround costs Difference in value of goods at time for delivery and actual delivery. Fees paid for services not properly performed. Indirect Unique economic loss Production shortfall Loss of anticipated saving Loss of reputation and goodwill Reduction of business value 6

7 Consequential loss The terms indirect, special and consequential are used interchangeably Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] Lloyds Rep 55 So consequential loss means loss recoverable under the second limb of Hadley v Baxendale consequential means special in the sense that it is unusual consequential loss exclusion won t limit liability for 1 st limb rules of remoteness used to interpret a term arguably understood to address causation 7

8 Environmental Systems P/L v Peerless Holdings P/L [2008] VSLA 26 Distinguish between: normal loss which is the loss that every plaintiff in a like situation will suffer; and consequential loss which is anything beyond the normal measure, such as profits lost or expenses incurred through the breach Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay [2009] NSWCA 224 Alstom v Yokogawa Australia (No 7) [2012] SASC 49 So consequential means anything beyond (or other than) the normal or conventional measure of damages 8

9 Peerless (2) Encapsulates McGregor s distinction between normal v special and claims the mantle of natural and ordinary meaning But what is the normal measure why use a rule for the measurement of damages to interpret consequential why automatically exclude all lost profits or expenses The words [indirect or consequential] must be given their ordinary and natural meaning. In those circumstances, any loss consequential or following, immediate or eventual, flowing from a breach of contract is excluded from recovery Alston v Yokogawa Australia [No 7] [2012] SASC 49 9

10 Regional Power Corporation v Pacific Hydro Group Two P/L [No 2] [2013] WASC 356 In 1994 Pacific Hydro agreed to construct Ord Hydro Power Station and then supply electricity from it to Regional Power In 2006, an outage occurred and it was inoperable for two months Regional Power claimed damages for: diesel generation at Kunanurra Power Station salary and travel for employees to Kunanurra Power Station equipment needed at Kunanurra Power Station diesel fuel 10

11 Regional Power (2) Neither the Project Entity nor SECWA shall be liable to the other party in contract, tort, warranty, strict liability, or any other legal theory for any indirect, consequential, incidental, punitive or exemplary damages or loss of profits 11

12 Regional Power (3) To reject the rigid construction approach towards the term consequential loss predicated upon a conceptual inappropriateness of invoking the Hadley v Baxendale dichotomy as to remoteness of loss, only then to replace that approach by a rigid touchstone of the normal measure of damages and which always automatically eliminates profits lost and expenses incurred, would pose equivalent conceptual difficulties. Martin J 12

13 Regional Power (4) At its widest, the word consequential might always be read as being somehow responsive to something, and thereby encapsulating almost every economic outlay, following upon a breach. But that is not a sensible meaning to attribute to the word consequential Martin J I regard consequential loss as confined to that loss which GEC might incur as a result of using or being unable to use its plant or capital investment for a purpose extraneous to that directly contemplated by the transaction documents Ryan J GEC Alstom Australia Ltd v City of Sunshine unreported

14 Consequential Loss-Summary Indirect loss Croudace Anything other than normal loss Peerless No predisposition to the meaning of the term Regional Power No High Court authority 14

15 Exclusion of Consequential Loss (1) The Hadley v Baxendale approach "Indirect or Consequential Loss" means any loss that would reasonably have been in the contemplation or was actually in the contemplation of the parties at the time this Agreement was entered into because of specific knowledge relating to the circumstances relating to this Agreement but which does not otherwise flow naturally from the breach. 15

16 Exclusion of Consequential Loss (2) The Definition approach "Indirect or Consequential Loss" means any of the following types of losses: loss of revenue loss of actual or anticipated savings loss of profit loss of goodwill lost opportunity any exemplary, punitive or special damage any other indirect or consequential losses 16

17 Exclusion of Consequential Loss (3) The Exclusions to Exclusions approach To the full extent permitted at law, Supplier is not liable for [list of excluded heads] or any indirect or consequential loss which, for the purposes of this exclusion, does not include the following losses or expenses: management time expended due to the breach cost of re-tendering costs of obtaining alternate services to the extent that such cost exceeds the amount that would have been payable to the Supplier cost of implementing remedial measures to work-around or compensate for the failure 17

18 Loss of Profits Typically indirect loss but some times direct loss Merit in specific treatment Loss of revenue v loss of profit 18

19 Rules of Construction Contra proferentum rule Exclusion of liability for negligence Repudiation or termination for fundamental breach Fraudulent misrepresentations which induce the other party to enter into the contract Third parties 19

20 Indemnities Construed strictly and any ambiguity resolved in favour of indemnifier - Andor Transport v Brambles 2004 Remoteness Mitigation Statute of Limitations 20